Over- and under-estimation of risks and counteractive adjustment for cold chain operations. A prospect theory perspective

Pages902-921
DOIhttps://doi.org/10.1108/IJLM-02-2017-0047
Date11 June 2018
Published date11 June 2018
AuthorShin-Ming Guo,Tienhua Wu,Yenming J. Chen
Subject MatterLogistics,Management science & operations
Over- and under-estimation
of risks and counteractive
adjustment for cold
chain operations
A prospect theory perspective
Shin-Ming Guo
Department of Logistics Management,
National Kaohsiung University of Science and Technology, Kaohsiung, Taiwan
Tienhua Wu
Department of Management, Air Force Institute of Technology,
Kaohsiung, Taiwan, and
Yenming J. Chen
Department of Logistics Management,
National Kaohsiung University of Science and Technology, Kaohsiung, Taiwan
Abstract
Purpose This study proposes the use of cumulative prospect theory (CPT) to predict over- and
under-estimation of risks and the counteractive adjustment in a cold chain context. In particular, the purpose
of this paper is to address the importance of the socio-demographic characteristics of an individual in
influencing risk attitude and the analysis of measurable risk probability.
Design/methodology/approach This study uses CPT as the basis to develop a decision analysis model in
which the two functions of value editing and probability weighting are nonlinear to adequately determine the
flexible risk attitudes of individuals, as well as their prospects with numerous outcomes and different probabilities.
An experiment was conducted to obtain empirical predictions, and an efficient Markov Chain Monte Carlo
algorithm was applied to overcome the nonlinearity and dimensionality in the process of parameter estimation.
Findings The respondents overweigh the minor cold chain risks with small probabilities and behavein a
risk-averse manner, while underweighting major events with larger ones, thereby leading to risk-seeking
behavior. Judgmentdistortion regarding probability was observed under risk decision witha low probability
and a high impact. Moreover, the findings indicate that factors, such as gender, job familiarity and
confidentialitysignificantlyinfluence the risk attitudesand subjective probabilityweighting of the respondents.
Research limitations/implications The findings fit the framework of CPT and extend this theory to
deal with human risk attitudes and subjective bias in cold chains. In particular, this study enhances the
literature by providing an analysis of cold chain risk from both the human decision-making and managerial
perspectives. Moreover, this research determined the importance of the socio-demographic characteristics of
an individual to explain the variability in risk attitudes and responses.
Practical implications Managers must consider the issues of flexible risk attitude and subjective
judgment when making choices for risk mitigation strategies. Given the focus on counteractive adjustment
for over- and under-estimated risk, firms could evaluate cold chain risk more accurately, and thereby enhance
their resilience to risky events while reducing the variability of their performance.
Originality/value The currentstudy is the first to materializethe phenomena of over- andunder-estimation
of cold chainrisks, as well as to emphasize the differentcharacteristicsfor loss aversion and judgmentdistortion
at the individual level.
Keywords Asia, Prospect theory, Risk attitude, Mixed method, Underweight, Cold chain operations,
Subjective bias, Overweigh
Paper type Research paper
The International Journal of
Logistics Management
Vol. 29 No. 3, 2018
pp. 902-921
© Emerald PublishingLimited
0957-4093
DOI 10.1108/IJLM-02-2017-0047
Received 24 February 2017
Revised 19 June 2017
22 July 2017
Accepted 16 January 2018
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/0957-4093.htm
This work was supported in part by Ministry of Science & Technology, Taiwan for the financial support
(MOST 104-2410-H-327-018-MY3, MOST 105-2511-S-344 -001). This paper forms part of a special section
Next-generation cold supply chain management: research, applications and challenges.
902
IJLM
29,3
1. Introduction
Given the emergence of globalization and improvements in logistics efficiency,
perishables and temperature sensitive products (PTSPs), such as fresh food, chilled
ready-to-eat food, fish and seafood products, blood and vaccines, are increasingly
produced and transported in international marketplaces (Bogataj et al., 2005; Sahin et al.,
2007). To meet the needs of customers, a special logistics chain called cold chain was
developed and has already gained increasing global interest. Cold chain refers to the
equipment, processes, and related services and information used to ensure the safety and
quality of PTSPs along the chain of production, distribution, and consumption (Bogataj
et al., 2005; Sahin et al., 2007; Montanari, 2008). Unlike non-temperature-sensitive
merchandise, PTSPs require strict control regarding their safety and quality along their
lifespan; otherwise, various risks, such as physical damage and losses, sanitary risks, and
bacterial infections, may occur, thereby causing damage to the health of consumers and
economic losses (Sahin et al., 2007).
The literature indicates that temperatureandtime,whicharetwomainfactorsin
preventing risks, can significantly affect the safety and quality of products (Sahin et al.,
2007; Ovca and Jevšnik, 2009; Kuo and Chen, 2010; Srivastava et al., 2015). However, these
two influencing factors present challenging concerns because a constant temperature
regime has to be maintained throughout the entire chain (Sharma and Pai, 2015).
The perishability and stability of products are also vulnerable to actors, storage
equipment and modes of transportation in all stages of the supply chain (Bishara, 2006;
Srivastava et al., 2015). Moreover, public regulatory authorities have increased
the requirements and control of food safety and temperature monitoring to ensure the
integrity of PTSPs, thereby suggesting considerable pressures for logistics service
providers to comply with regulations and achieve cost-effective operations (Bogataj et al.,
2005; Bishara, 2006; Kuo and Chen, 2010).
Previous studies have addressed temperature and time as the critical risks to product
safety and quality that may lead to possible economic losses. However, most authors
have not extensively explored the decision-making processes of managers for the
prevention of such risks or the mitigation of their impact. For example, a few researchers
focused on the application of advanced technology to monitor and control temperature
and time (Sahin et al., 2007; Montanari, 2008; Hafliðason et al., 2012). By contrast, others
considered supply chain design and flow to achieve optimal control or effectiveness of
cold chains (Bogataj et al., 2005; Sharma and Pai, 2015). Moreover, several researchers
proposed an innovative distribution system for an improved temperature-controlling
logistics (Kuo and Chen, 2010). Only a few reviews focus on cold chain risk analysis from
the decision-making and managerial perspectives. Although the notable exceptions
include Bishara (2006) and Srivastava et al. (2015), the analysis of the former is limited
to descriptive data, whereas the latter identifies risk based on the subjective views
of managers.
Although cold chain issues are of immense interest in practice and in academia,
research on risk evaluation, decision and management in cold chains remains limited. To
fill in this research gap, the current study aims to analyze the decision behavior of
managers that is associated with risk analysis and management in a cold chain. Although
risk has been viewed as different concepts for various people, such an idea is often
considered the probability of an event from which an individual perceives the impact of a
negative outcome (Sjöberg et al., 2004). From the perspectives of decision science and
psychology, risk extends beyond the probability of a dangerous event and its
consequences; instead, this concept can be perceived in psychological, social, and cultural
contexts (Schmidt, 2004). In addition, the risk attitude of people is more toward risk
aversion than the pursuit of opportunity (Sjöberg et al.,2004).Therefore,theliterature
903
Cold chain
operations

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